Kodak Reports Significantly Improved 2nd Quarter Operating Results on Sales of $2.510 Billion

Reaffirms Full-Year Cash, Digital Revenue, and Digital Earnings Goals; Reduces 2nd Quarter SG&A Expenses by $87 Million; Gross Profit Margins Improve Across All Major Businesses, Driven by Reduced Cost; GAAP Pre-Tax Loss from Continuing Operations Reduced by 41% to $173 Million; Company Ends Quarter with $1.925 Billion in Cash; New Consumer Inkjet Products and Imaging Sensor Technology Seeing Positive Market Acceptance; Graphic Communications Group’s Enterprise Solutions Business Achieves a 40% Sales Increase

ROCHESTER, N.Y., Aug. 2 -- Eastman Kodak Company (NYSE:EK) today reported a $121 million year-over-year improvement in pre-tax results from continuing operations, reflecting gross profit margin improvements across all of its major business units. The company achieved a $97 million improvement in digital earnings and a $31 million improvement in traditional earnings, as expenses declined. In addition, the company reported a $135 million after-tax loss from continuing operations, or $0.47 per share, an improvement of $220 million, or $0.77 per share, as compared to the prior year.

Kodak also reaffirmed its plan to achieve its full-year financial goals for net cash generation, digital revenue growth and digital earnings.

“Our second-quarter results reinforce our confidence in our full-year performance,” said Antonio M. Perez, Chairman and Chief Executive Officer, Eastman Kodak Company. “Revenues during the second quarter were in line with our expectations. Earnings improved across all of our major business units, reflecting our strong focus on cost reduction and operational efficiencies. We continue to expect a strong second half, with double-digit sales growth in both of our major digital businesses, driven by a stronger-than-ever portfolio of digital products, including our revolutionary consumer inkjet printing system, new image sensors, workflow software, and an expanded line of NEXPRESS digital color printing presses. I’m pleased with our first-half results, and I remain confident in our ability to achieve our 2007 key strategic objectives.”

On the basis of generally accepted accounting principles in the U.S. (GAAP), the company reported a second-quarter loss from continuing operations of $173 million pre-tax, $135 million after tax, or $0.47 per share, compared with a loss of $294 million pre-tax, $355 million after tax, or $1.24 per share in the year-ago period. Items of expense impacting comparability in the second quarter of 2007 totaled $266 million after tax, or $0.92 per share. The most significant item was restructuring costs of $316 million before tax and $248 million after tax, or $0.86 per share.In the second quarter of 2006, items that impacted comparability totaled $206 million after tax, or $0.72 per share, primarily reflecting restructuring costs.

For the second quarter of 2007:

Sales totaled $2.510 billion, a decrease of 7% from $2.688 billion in the second quarter of 2006. Digital revenue totaled $1.460 billion, a 3% increase from $1.417 billion. Traditional revenue totaled $1.044 billion, a 17% decline from $1.262 billion in the year-ago quarter.
The company’s second-quarter loss from continuing operations, before interest, other income (charges), net, and income taxes was $163 million, compared with a loss of $257 million in the year-ago quarter.
Other financial details:

Gross Profit margin was 26.2% for the quarter, up from 21.4% in the prior year, primarily attributable to lower costs, driven by manufacturing footprint reductions and the favorable impact of foreign exchange, offset by adverse silver and aluminum costs.
Selling, General and Administrative expenses decreased $87 million from the year-ago quarter, reflecting the company’s cost reduction activities. SG&A as a percentage of revenue was 17%, down from 19% in the year-ago quarter.
Net Cash Generation for the second quarter was negative $251 million, compared with negative $74 million in the year-ago quarter. Net Cash Generation for the first half of 2007 was negative $704 million, compared with negative $691 million in the year-ago period. This corresponds to net cash used in operating activities from continuing operations of $298 million for the second quarter, compared with $17 million in the year-ago quarter, driven primarily by changes in working capital. For the first half of 2007, net cash used in operating activities from continuing operations was $695 million, compared with $554 million in the year-ago period.
On April 30, 2007, the company completed the sale of its Health Group to an affiliate of Onex Corporation for $2.350 billion. As previously announced, the company used a portion of the cash proceeds from that transaction to fully repay $1.145 billion of outstanding secured term debt. As of June 30, 2007, the company’s debt level was $1.624 billion, a $1.154 billion reduction from the 2006 year-end debt level of $2.778 billion.
Kodak held $1.925 billion in cash and cash equivalents as of June 30, 2007.
Segment sales and results from continuing operations, before interest, taxes, and other income and charges (earnings from operations), are as follows:

Consumer Digital Imaging Group results improved by $78 million to a loss of $55 million, compared with a year-ago loss of $133 million. This improvement was driven by changes in product portfolio management and lower SG&A expenses, partially offset by scaling of the manufacturing and new product introduction activities in the Inkjet Systems business. Revenues for the second quarter totaled $1.000 billion, down from $1.105 billion in the year-ago quarter. This largely reflects anticipated decreases in traditional photofinishing products and services at retail, partially offset by growth in consumer imaging services and imaging sensors. The new consumer inkjet printer line continues to receive strong customer response and the company continues to expand retail distribution as it increases manufacturing capacity.
Graphic Communications Group earnings from operations were $44 million, compared with $16 million in the year-ago quarter. This earnings increase was primarily driven by manufacturing productivity improvements and lower SG&A expenses, partially offset by higher aluminum costs. Sales for the second quarter were $929 million, a 2% increase from the year-ago quarter. Revenues from digital products improved by 6% for the quarter versus the prior year, driven by favorable foreign exchange and increased sales of digital plates. In addition, the Enterprise Solutions business achieved a 40% revenue increase, driven by strong sales of workflow software.
Film Products Group earnings from operations were $137 million, compared with $119 million in the year-ago quarter, representing a strong improvement in the face of declining revenue. During the second quarter of 2007, the group achieved a 25% operating margin, as compared with 18% in the year-ago quarter. The operating margin performance resulted from changing product mix, lower depreciation expense, and actions to reduce traditional infrastructure ahead of revenue declines. Film Products Group sales were $559 million, down from $660 million in the year-ago quarter, representing a decrease of 15%.
“The performance of our business units this quarter is more evidence of the progress that we are making in positioning Kodak for sustainable success,” said Perez. “I am proud of my team’s performance and I am encouraged by the enthusiastic market response to our new products. We continue to make great strides in transforming Kodak into a growing, profitable digital company.”

2007 Outlook Reaffirmed

Kodak remains focused on three financial metrics as it continues to transform its business: net cash generation, digital earnings from operations and digital revenue growth.

As indicated during its first-quarter conference call with investors, the company’s goal for net cash generation this year is in excess of $100 million after restructuring disbursements of approximately $600 million. This outlook corresponds to expected net cash provided by continuing operations from operating activities, on a GAAP basis, in the range of $200 million to $450 million.

Additionally, the company’s goal for 2007 full-year digital earnings from operations is $150 million to $250 million, which corresponds to a GAAP loss from continuing operations before interest, other income (charges), net, and income taxes for the full year of $550 million to $650 million.

Finally, the company continues to forecast 2007 digital revenue growth of 3% to 5%, with total 2007 revenue expected to be down between 4% and 7%.

Conference Call

Antonio Perez and Kodak Chief Financial Officer Frank Sklarsky will host a conference call with investors at 11:00 a.m. Eastern Time today. To access the call, please use the direct dial-in number: 913-312-1292, access code 4557735. There is no need to pre-register.

For those wishing to participate via an Internet Broadcast, please access our Kodak Investor Center web page at: http://www.kodak.com/go/invest.

The call will be recorded and available for playback by 2:00 p.m. Eastern Time today by dialing 719-457-0820, access code 4557735. The playback number will be active until Thursday, August 9th at 5:00 p.m. Eastern Time.